Fed faces tough policy decision in last meeting of 2025ーNHK WORLD-JAPAN NEWS

Key Concepts

• Current Account: A measure of a nation's transactions with the rest of the world, including trade in goods and services, income, and direct payments.
• Trade Balance: The difference between a country's exports and imports of goods and services.
• US Federal Reserve (The Fed): The central bank of the United States, responsible for monetary policy.
• Federal Funds Rate: The target rate that the Fed sets for overnight lending between banks, influencing broader interest rates.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Employment Market: The overall condition of job availability, unemployment rates, and wage growth.
• US Government Shutdown: A situation where non-essential government operations cease due to a failure to pass appropriations bills.
• GDP Now: A real-time estimate of current economic growth produced by the Federal Reserve Bank of Atlanta.
• Status Quo: The existing state of affairs.
• FOMC (Federal Open Market Committee): The principal monetary policymaking body of the Federal Reserve.
• Interest Rate Cut: A reduction in the central bank's benchmark interest rate.
• Data Dependency: The principle of making policy decisions based on incoming economic data.
• US Treasury Secretary: The head of the U.S. Department of the Treasury, responsible for fiscal policy.

Economic Stories to Track in the Week Ahead

This segment outlines key economic data releases and policy decisions scheduled for the upcoming week.

• Monday:
  • Japan: Release of the latest reading for the current account, a crucial indicator of Japan's trade and investment activities with the global economy.
  • China: Publication of figures on China's trade balance for November.
• Wednesday:
  • US Federal Reserve: Conclusion of the Federal Open Market Committee (FOMC) meeting, with the announcement of its monetary policy decision. This is the last FOMC meeting of 2025.

US Federal Reserve Policy Decision and Influencing Factors

The upcoming FOMC meeting is a central focus, with expectations surrounding a potential interest rate adjustment.

• Previous Rate Cut: The Fed previously cut its key rate by a quarter of a percentage point (0.25%) for the second consecutive meeting in October.
• Reason for Previous Cut: The primary reason cited for the October cut was a slowdown in the employment market.

Complicating Factors for the Fed's Judgment

Several factors are making it difficult for the Fed to assess the economic situation and make a clear policy decision.

• Impact of US Government Shutdown: Shidai Sudi, a former Bank of Japan policy board member, highlights that the lack of economic data due to the recent US government shutdown may significantly impact the Fed's judgment.
  • Data Lag: November employment data will be released after the FOMC meeting concludes, making it challenging to incorporate this crucial information into the decision-making process.
• Conflicting Economic Data:
  • Positive Indicators: Some data points suggest improvement, such as new job creation and retail consumption data that is "not extremely bad."
  • Strong GDP Estimate: The GDP Now estimate produced by the Atlanta Federal Reserve is described as "very good."
  • Overall Assessment: Existing data does not strongly indicate a severe deterioration in the US economy or employment conditions.
• Shidai Sudi's Recommendation: Based on the available data, Shidai suggests it would be "better for Fed to maintain the status quo this time and wait until the data come out." She believes this would be the "appropriate decision."

Political Pressure on Fed Chair Jerome Powell

Significant political pressure is being exerted on Fed Chair Jerome Powell, which could influence policy decisions.

• Criticism from US Treasury Secretary Scott Bessant:
  • Direct Criticism: US Treasury Secretary Scott Bessant openly criticized the Fed's operations and speeches by its regional heads on a business news channel.
  • Demand for Fed to "Move Back into the Background": Bessant's statements indicated a desire for the Fed to reduce its public profile and influence.
  • Unprecedented Criticism: Shidai notes this is the first time Bessant, known for his market understanding and emphasis on Fed independence, has offered such "comprehensive criticism."
• Impact of Pressure: Shidai believes the growing pressure on the Fed could "shape decisions."

Market Expectations vs. Powell's Stance

While many in the financial market anticipate another rate cut, Powell's approach is characterized by a commitment to data dependency.

• Market Expectation: Many in the financial market expect another rate cut.
• Powell's Emphasis on Data Dependency: Shidai reminds that "Mr. Powell always emphasize it's data dependent."
• Dilemma for Powell: It is "very difficult for him to make a decision to lower interest rate when data doesn't really suggesting severe deterioration of labor market and economy looks still okay."
• Potential for Maintaining Status Quo: Shidai suggests it "may be possible that he may decide to maintain status quo."

Potential for a Close FOMC Vote

The complex interplay of economic data and political pressure could lead to a divided decision within the FOMC.

• Close Vote: Shidai concludes that the current situation surrounding the Fed "could mean a close vote by the policy makers."

Conclusion

The upcoming week is marked by significant economic data releases from Japan and China, and critically, the US Federal Reserve's final policy decision of 2025. The Fed faces a challenging environment due to conflicting economic signals, the impact of a government shutdown on data availability, and intense political pressure on its leadership. While market sentiment leans towards another interest rate cut, Fed Chair Jerome Powell's commitment to data dependency, coupled with mixed economic indicators, suggests that maintaining the status quo is a strong possibility. The political scrutiny, particularly from the US Treasury Secretary, adds another layer of complexity, potentially leading to a closely contested vote by the FOMC members.